Good Sunday morning, and welcome to a special edition of the DealBook Briefing, where we’ll take a deep dive into Pinterest’s upcoming public offering. It’s the second of many decacorns — $10 billion-plus start-ups — to go public this year. And it could be an indicator of what’s to come during the rest of 2019. (Was this email forwarded to you? Sign up here.)
A barometer for I.P.O.s to come
What is investors’ appetite for fast-growing, highly valued start-ups that are burning cash?
Many of the world’s most prominent tech start-ups are about to find out. Lyft has already listed, Uber will head to market in May, and Slack and Postmates are expected to follow soon.
The next test comes this week with Pinterest. The digital pin board company plans to sell shares to investors and make its public market debut in the coming days.
This is a slightly different breed of unicorn. Pinterest is burning less cash than some of the other big names going public this year, like Lyft and Uber. And it expects to price its I.P.O. below its last private market valuation.
Lyft has struggled since its market debut last month. Its shares are trading 17 percent below the offering price.
So is that a Lyft thing, or a tech I.P.O. thing? If Pinterest can avoid a Lyft-style early wave of selling, it may ease concerns for the companies expected to follow.
Here’s your cheat sheet for the offering.
Today’s DealBook Briefing was written by Stephen Grocer in New York and edited by Jamie Condliffe in London.
How Pinterest’s business stacks up
The company grew out of Cold Brew Labs, a tech incubator founded in 2008 by Ben Silbermann, who became Pinterest’s chief executive, along with Evan Sharp and Paul Sciarra. It calls itself “a productivity tool for planning your dreams” — to you and me, it’s a web service that lets you save images to virtual pinboards.
Here’s how it sizes up today:
Pinterest has taken a low-key approach, rejecting Silicon Valley’s typical unicorn formula of moving fast, breaking things and chasing growth at all costs.
That has spared it the controversies about disinformation and harmful content that have engulfed peers like Instagram, Facebook, YouTube and Twitter.
But it has grown steadily over the last two years, particularly as people outside the United States have begun to gravitate to its service.
It had 265 million monthly active users in the fourth quarter of 2018, according to the company. That’s compared with 216 million in the fourth quarter of 2017.
Its plan for the offering
Pinterest will list its shares on the New York Stock Exchange under the ticker “PINS.”
It hopes to be valued at $11.3 billion including stock options and restricted stock. It plans to sell 86.3 million shares, including the additional shares allotted to the underwriters, at a price between $15 and $17 a piece. At the top of that range, the company would raise $1.5 billion.
That’s below the $12 billion valuation that private investors and venture capital firms placed on the company in 2015 and 2017.
If Pinterest does go public below its last private market valuation, it would not be the first highly valued start-up to do so recently. Box, a cloud storage company, and Square, a payments company, both did it, and both now trade above those private valuations.
But Pinterest could price higher if investor demand has proved robust during its roadshow.
Goldman Sachs, JPMorgan Chase and Allen & Company are underwriting the offering. In all, Pinterest will have 12 underwriters.
A look at Pinterest’s books
Pinterest is the rare unicorn preparing to go public this year that is not hemorrhaging cash at an alarming rate.
Pinterest lost $63 million in 2018. That put it far closer to making a profit than the previous year, when it lost $130 million.
While it is unprofitable, its losses are far lower than those of other well-known start-ups like Uber and Lyft.
And it’s growing quickly. The company’s revenue, which came from advertising, totaled $756 million last year, up 60 percent from a year earlier.
It listed a cash stockpile of $628 million.
Pinterest’s plan for keeping control
After going public, the company will have two classes of stock: class A shares, which carry one vote each, and class B shares, which carry 20 votes. Pinterest’s founders, top executives, employees, big investors and directors will be given class B shares; new investors will get class A shares.
The holders of the class B stock will have 99.2 percent of the voting power after the I.P.O. Pinterest’s three founders will control about 23 percent of the voting power. Bessemer Venture Partners will have the most control of any single investor, with 13 percent of the voting power. Pinterest acknowledges in its I.P.O. prospectus that this will limit investors’ ability to influence it.
Such share structures have grown in popularity in Silicon Valley. Lyft also went public with a dual-class share structure; its two founders now own roughly 5 percent of the stock, but control of nearly 49 percent of the voting power. Facebook, Google and Snap have all famously used dual-class structures, too.
But the practice is increasingly controversial among governance experts. And Kobi Kastiel and Lucian Bebchuk from Harvard Law School have warned that the dual-class structure may “significantly decrease the economic value of Pinterest’s low-voting shares.”
What can go wrong?
The risk factor section of any I.P.O. prospectus acts as a warning label for investors. Pinterest’s is no different — here’s a rundown of what it thinks can go wrong.
Advertising: “The failure to attract new advertisers, the loss of advertisers or a reduction in how much they spend could harm our business,” Pinterest writes.
Security: “If our security is compromised, or Pinners or advertisers believe our security has been compromised, Pinners and advertisers may use our service less or may stop using our service altogether.”
Infrastructure: “We depend on Amazon Web Services for the vast majority of our compute, storage, data transfer and other services. Any disruption of, degradation in or interference with our use of Amazon Web Services could negatively affect our operations.”
Regulation: “We receive, process, store, use and share data, some of which contains personal information, which subjects us to complex and evolving governmental regulation.” It adds that it “may be liable as a result of content or information that is published or made available on our service.”
Rivals: Because Pinterest makes money from online advertising, it acknowledges that it is a competitor to big names like Facebook, Instagram, Amazon, Google, Twitter and Snap. It also sees websites like the recipe repository Allrecipes, the home improvement website Houzz and the cookery site Tastemade as rivals.
Who’s going to get rich?
For Pinterest’s current shareholders and employees, as well as the private market investors who have poured around $1.5 billion into the company, the I.P.O. could provide a windfall. Here’s a rundown of who stands to gain:
Mr. Silbermann would hold a stake worth $878 million at the high end of the offering.
Mr. Sciarra and Mr. Sharp, his fellow co-founders, will hold stakes worth $721 million and $161 million.
Bessemer Venture Partners will be Pinterest’s largest shareholder, with a stake worth about $1 billion.
FirstMark and Andreessen Horowitz are the next two biggest venture capital investors with holdings of $755 million and $740 million.
Fidelity and Valiant Capital Management will hold stakes of $549 million and $460 million.
What everyone’s saying about the I.P.O.
Pinterest is “taking some of the hype out of the I.P.O. process” by initially pricing its I.P.O. below its last private market valuation, Gina Chon of Breakingviews argues. That, she says, could help it argue that its “conservative approach puts the long-term interests of both the company and its investors first.”
On the other hand, Pinterest’s “guarded approach may be risky,” Laura Forman of Heard on the Street writes. Since 2014, just 13 U.S. tech companies have priced their I.P.O. below their last private market valuation, she says, and “the 10 of those with publicly available financing data that have traded for a full 12 months lost 19.2 percent of their value on average in their first year.”
“Is it good enough to grow at 60 percent a year?” Shira Ovide of Bloomberg Opinion asks. “Under normal circumstances, this kind of company would be a must-have for investors,” she adds, but with investors also considering growth-focused companies like Lyft and Uber, Pinterest could experience “cooler demand from investors.”
And finally, its elevator pitch
An I.P.O. prospectus often features an idealistic, sometimes corny, letter from the company’s founders about their vision for the firm. Pinterest’s might make non-Silicon Valley types squirm a little, but it also takes a not-so-subtle dig at other social networks:
“Pinterest is designed to inspire. Pinners tell us they love how they feel on Pinterest: optimistic, confident and inspired. We work hard to keep the enemies of inspiration — comparison, cynicism, judgment — off of Pinterest.”
“Pinterest is personal. Not social. Pinterest isn’t about your friends or celebrities, it is about you. There are many tools to connect people, but there are few that help you connect with yourself.”
“Pinterest is made for real world action. Most ideas on Pinterest can be made, bought, tried or visited. Our end goal isn’t for you to browse images and videos all day. We want you to eventually make the ideas you see a part of your life.”
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